Part 3: Passive income & the bright side of being priced out of the market
This post is part 3 of a 3 part series, where I share some key moments on my journey to financial freedom. It was originally featured in Notes & Stories Magazine on December 5, 2018.
My money journey started in 2014 when I decided to repay my debt in 6 months. It definitely wasn’t easy, but it was worth it to start building my wealth as opposed to paying the bank! Little did I know, in winter 2015, I would have the opportunity to buy a condo in one of the most coveted real estate markets on earth. Again, stretching myself and committing to this financial opportunity opened more doors than I ever could have imagined.
Pre-sale real estate
The condo we purchased in 2015 was a pre-sale development, meaning it would be ready to live in sometime in fall 2016. The advantages to this kind of investment are:
The suite is brand new, under warranty when you take possession
You have extra time to save money for a larger down payment
The market value has an opportunity to rise while the building is being built
The disadvantages are that your cash is tied up for a few years in advance of you living in the home. You have to trust the building company with your cash before the home is built.
The arrangement works best when you are happy where you’re currently living, the builder has a great reputation and need some time before your next big move. That was us!
Our Next Big Goal
By the time we moved into our condo in late 2016, our goals had evolved. Two years is a long time in the life of ambitious millennials. Our priorities for 2017 and beyond were to start a family and continue building our wealth through generating passive income.
We were priced out of moving up the real estate ladder, even in North Vancouver. We took a year to consider our options:
We could stay in our condo and build our investment nest egg, without passive income
We could purchase a townhome and extend ourselves to be completely house rich and cash poor, with limited options for passive income
We could move cities, buy a bigger place and keep our condo to generate multiple opportunities for passive income.
With the big city hustle and many hours of my life spent on public transit, option number 3 was looking better and better. We started exploring our options in BC’s beautiful (and relatively affordable) capital city, Victoria.
Making the leap
In winter 2018, we purchased a big, beautiful heritage duplex in Victoria, BC. We used a combination of savings and equity for the down payment, keeping both mortgages very well below the assessed values.
Becoming a landlord
I have to admit that becoming a landlord was a bit scary! I was overwhelmed with worries about what could go wrong, understanding the rules of the Residential Tenancy Act and listing our place.
I needed to get my head around the fact that everyone needs a place to live and someone owns every place to live. If I truly want to build my wealth, why couldn’t I be the one to provide housing?
By taking small steps towards a big goal, it became our reality.
Setting a price
Before setting the monthly rental price, I calculated approximately how much it would cost to operate each property including mortgage payments, property taxes, city taxes, maintenance, electricity and gas.
I also researched how much other places were renting for in the area so that we could set a competitive price.
Finding awesome tenants
I posted our condo on all of the usual sites – craiglist, kijiji and told all of our friends. We had more than 10 applications in the first few days and as soon as we met our current tenants, I had a great feeling. I did my due diligence, calling references and setting up a clear rental contract.
To this day, we have the most delightful family living in our condo and I couldn’t be happier. I am so grateful that they are taking care of our place and enjoy living there.
The passive income generated by our condo is about $6000/ year short of what it costs to own the suite. As long as we’re smart about our taxes and can keep our cash flow up to cover the remainder, we’ll maintain this investment.
We recently set up a short-term rental suite in our house in Victoria, which will more than make up for the difference in income. Follow along on The Money Edit blog to share tips and tricks, and learn about our short term rental adventures!
Taking our Chances
Thoughtful investing takes the same skills I learned in repaying debt and building our savings. As our family’s CFO, I am personally motivated to maintain a spreadsheet to calculate costs and keep track of our spending, taxes and investments.
Investing is always a chance, with the outcome not 100% guaranteed. But for now, we’re happy to stay invested in the Victoria and Vancouver markets, generate passive income and provide relatively affordable rental housing for our awesome tenants.